House of Commons portcullis
House of Commons
Session 2009 - 10
Publications on the internet
General Committee Debates
Delegated Legislation Committee Debates



The Committee consisted of the following Members:

Chairman: Mr. Edward O'Hara
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Barker, Gregory (Bexhill and Battle) (Con)
Boswell, Mr. Tim (Daventry) (Con)
Brown, Lyn (West Ham) (Lab)
Cawsey, Mr. Ian (Brigg and Goole) (Lab)
Cohen, Harry (Leyton and Wanstead) (Lab)
Heald, Mr. Oliver (North-East Hertfordshire) (Con)
Hughes, Simon (North Southwark and Bermondsey) (LD)
McNulty, Mr. Tony (Harrow, East) (Lab)
Morden, Jessica (Newport, East) (Lab)
Roy, Lindsay (Glenrothes) (Lab)
Ruddock, Joan (Minister of State, Department of Energy and Climate Change)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Tredinnick, David (Bosworth) (Con)
Wiggin, Bill (Leominster) (Con)
Willis, Mr. Phil (Harrogate and Knaresborough) (LD)
Anne-Marie Griffiths, Committee Clerk
† attended the Committee

Second Delegated Legislation Committee

Tuesday 23 February 2010

[Mr. Edward O’Hara in the Chair]

Draft CRC Energy Efficiency Scheme Order 2010
10.30 am
The Minister of State, Department of Energy and Climate Change (Joan Ruddock): I beg to move,
That the Committee has considered the draft CRC Energy Efficiency Scheme Order 2010.
As always, it is a pleasure to serve under your chairmanship, Mr. O’Hara. The carbon reduction commitment makes provisions that will drive forward energy efficiency and emissions reductions in large organisations. It has been developed with significant business and public sector input over the past four years. The order is the first to be laid before Parliament under powers in the Climate Change Act 2008 providing for the creation of trading schemes.
The challenge that climate change presents is vast and urgent, and reducing emissions requires determined action. As a consequence, we passed the 2008 Act in this House. As well as making provisions for carbon budgets and other measures to reduce our carbon emissions, it also provides the legislative basis for the order, which will encourage participating organisations to reduce their emissions and become more energy-efficient. Energy efficiency is critical for the UK’s emissions reduction effort and provides a triple win—saving energy, saving money and reducing emissions.
An analysis of the large private and public organisations sector by the Carbon Trust in 2005 found significant potential for cost-effective emissions reductions through energy efficiency. That has been borne out by the trust’s subsequent experience in advising organisations of their opportunities in detail. Its most recent analysis of the non-domestic building sector suggests that reductions of 70 to 75 per cent. could be made by 2050 at no net cost, using methods and technologies that are available today. The measures for reducing emissions that represent the best value for money are to increase the energy efficiency of heating and lighting, which together represent 89 per cent. of effective cost savings. Despite the abundant potential for reductions, emissions from the sector have remained relatively constant for the past 20 years.
In its analysis, the trust found evidence that the introduction of energy efficiency measures was being hampered by at least four obstacles: insufficient financial incentives to reduce emissions, uncertain reputational benefits of demonstrating leadership, split incentives between landlords and tenants, and organisational inertia. The disappointing rate of implementation of energy efficiency measures is one of the reasons why the Government decided to introduce the CRC energy efficiency scheme.
The CRC is intended as a catalyst for action, and is designed specifically to address the barriers. We therefore propose introducing the scheme this April. It will cover large public and private sector organisations that produce approximately 10 per cent. of the UK’s emissions, and will stimulate changes in behaviour and infrastructure by introducing new drivers tailored to overcome the barriers identified.
Private and public sector organisations that have at least one half-hourly meter, settled on the half-hourly market, and that use more than 6,000 MWh of electricity through all their half-hourly meters will qualify for the scheme. Roughly speaking—this is just a rule of thumb—that means that organisations that spend around £500,000 per annum on their energy bills are likely to be covered by the CRC.
The Government will lead by example. All Departments will participate in the scheme, even if they do not meet the qualification threshold. Participants will be required to identify and report annually their electricity, gas and fuel-related emissions. Domestic housing and transport emissions will not be included in the scheme. Participants will be required to surrender a CRC allowance for every tonne of carbon dioxide emitted as a consequence of their reported energy supplies. Allowances can be bought from the annual Government sale or from the secondary market.
We have also created an additional safety-valve, buy-out mechanism. The floor price of that mechanism will be increased from the £12 per tonne of CO2 originally proposed to £14 per tonne of CO2 to ensure that it is used only as a last resort. That is provided for in the recently published regulations that are to be made under the Finance Bill of 2010, which will be laid before Parliament shortly.
After each year, the Environment Agency as the scheme administrator will publish a league table ranking participants by how effectively they reduce their emissions and become more energy-efficient. CRC will be broadly revenue-neutral to the Exchequer. All revenue raised from the annual sale of allowances will be recycled back to participants according to how well they perform in the league table.
Mr. Oliver Heald (North-East Hertfordshire) (Con): One of the concerns expressed about the European emissions trading scheme relates to price volatility. To what extent does the Minister think that that will occur in the scheme that she has outlined? Or does she feel that the mechanism that she began to describe will stop that from happening? Businesses will want to be able to plan, and knowing what the prices are likely to be is part of that.
Joan Ruddock: We agree very much with what the hon. Gentleman has said, which is why we have an introductory phase. We are aware that many organisations will have no experience of trading, so it is important that they have a period when they can get used to the idea. We have begun with a whole year of reporting only so that they begin to understand how much energy they are using and where it is coming from. Then we begin with a phase in which they have to buy allowances, which will be next year in 2011. At that point, they will know the fixed price—it has already been announced that it is £12 per tonne. That will continue until 2013. For that period, people will be helped to be able to report and trade effectively, with certainty of price. Beyond that, it is important to begin what is at the heart of the trading scheme, which is increasing the pressure to make it more competitive, so that it results in real reductions. From 2013, there will be auctioning of allowances, which will introduce price volatility, as it is supposed to do.
Mr. Tim Boswell (Daventry) (Con): Further to that helpful set of exchanges, will the Minister tell us whether the intention in drawing up the league table is to produce one that is differentiated by sector? I declare an interest because I am a governor of a university. The situation in the university sector, where we do not benchmark against each other on academic and other concerns, may be very different from that of a commercial undertaking or a Government Department. Can the Minister assure us that at least some acknowledgment will be made of the difference in character between the various organisations, with possibly a slight tweak in the incentives pattern according to their particular needs?
Joan Ruddock: I understand the concern that the hon. Gentleman raises. We have looked carefully at whether the scheme should be sectoral. It is not too complex, but it is a new thing for many participants, and we do not want to make it more complex than it needs to be; that is why we have not gone down the sectoral route. However, the scheme will be carefully monitored, and we will look at how well it works. If people perceive unfairnesses, they will raise them, and we will ask ourselves whether we need to do more. Having said that, people will probably look to comparators within their sector, rather than saying that their university must be compared with Tesco.
It is important to stress that the league table idea found favour in the consultation and that, increasingly, the public are concerned about such issues, so organisations— whether universities or private companies—probably have some sense that it is to their advantage to demonstrate their good works. That, and financial incentives, are provided for in the league table.
Simon Hughes (North Southwark and Bermondsey) (LD): The matter of league tables was discussed widely in the consultation. It was obviously a controversial issue. Following the intervention of the hon. Member for Daventry, I wish to support the proposition that, ideally, comparing apples with apples and pears with pears would be a better and more useful incentive. Secondly, the trial year runs from this April to next April. If it became more clearly the consensual view that a sectoral approach should be taken, would it be possible, by the beginning of the real operational year—next year—to move to that sectoral definition? Thirdly, given that all Departments will be included, will all local government organisations and all quangos be included in the operation?
Joan Ruddock: On the first point, if we wanted to amend the scheme in any way after the first reporting year, I would be surprised. After a year, we would not have enough experience, so such action would be premature. I am not suggesting that there is a likelihood that that would happen, and as I have said, the scheme will be monitored. We want it to work. We want to be reasonable, but we would not get enough experience within 12 months.
As for what will be covered, 6,000 MWh is the threshold to which I have referred. Beyond that, all Departments will participate. We have taken powers that enable us to include local authorities that would not otherwise meet the definition. The only use of that power that we have anticipated is on the Greater London authority. Obviously, we have been in contact with the Mayor of London. He is content that the GLA should come within the provisions of the CRC. That is desirable essentially because it must be able to save energy and money, but equally, as I am sure that the hon. Member for North Southwark and Bermondsey would agree, as this is a reputational issue, it would look strange if the authority, which runs our capital city, did not participate and demonstrate its leadership role. That is the reason for the provision.
The scheme has been designed to overcome the three main barriers to energy efficiency. The league table overcomes the barrier of unclear reputational incentives. It will provide clear evidence of which organisations are the most energy-efficient. That information will be available to investors, the public and other companies procuring goods and services. For the first time, energy efficiency will be a reputational issue. During our consultations on the scheme, the reputational driver was the focus of most potential participants’ attention.
Another barrier that we must address is the split incentive between landlords and tenants; that is a genuinely difficult area. We have chosen to assign the responsibility for reducing emissions to the landlords when they manage the contract with the electricity supplier—an important linkage. Landlords in the commercial sector currently have few, if any, incentives to help keep the energy bills of their tenants down. Officials have met representatives of both landlords and tenants and have carefully considered the options. The CRC will introduce the incentives that we believe are necessary to tackle the landlord-tenant area.
The lack of financial incentives is countered by revenue recycling, which adds an incentive on top of savings on energy bills for high performers. Another barrier that I identified is organisational inertia. That is addressed by the CRC, which we believe will bring energy efficiency to the attention of the senior management via the rankings in the league tables, and through the financial demands of planning for the CRC and the introduction of energy efficiency measures. It is expected that the need to plan for and purchase carbon allowances will gain the attention of financial directors in a way that an incremental carbon tax, for example, would not. The requirement for the up-front purchase of allowances each April is specifically intended to make organisations plan, rather than deal with the consequences when the energy bills are paid, as currently happens. Finally, the fact that an organisation’s energy efficiency choices directly impact on how much money will be recycled to them provides a novel financial incentive that is already drawing a lot of attention from potential participants.
The unique combination of financial and reputational drivers will bring the CRC and energy efficiency to the attention of boardrooms across the country, and will do so more effectively than other policy approaches. By targeting the CRC on overcoming the barriers that have blocked progress in this area for so long, we are confident that by 2020, it will have delivered emissions savings of at least 4 million tonnes of CO2 a year and financial savings for participants of around £1 billion a year.
We listened carefully to stakeholders during three rounds of consultation, and amended the scheme to improve its focus on energy efficiency and allow greater flexibility for participants. In the latest consultation, we received 276 responses from a wide variety of organisations, such as potential participants and their sector associations. Some 68 per cent. of the responses supported the proposed policy. My officials, the Environment Agency and I have presented at, or hosted, around 140 events in the past year to consult on and raise awareness of the scheme. My experience of meeting stakeholders was that many recognise the opportunity and the financial and reputational advantages that the CRC presents.
The CRC energy efficiency scheme is an innovative, groundbreaking scheme that will drive forward energy efficiency. Too many organisations have ignored the possibilities for too long, and taking action will be good for the environment and, I believe, the economy.
10.47 am
 
Contents Continue
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2010
Prepared 24 February 2010